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Musk man, not Iron Man 

6 November 2013 By Antony Currie

Tesla shareholders are finally learning that founder Elon Musk is only human. The executive said to be the inspiration for Iron Man alter ego Tony Stark presided over a $15.9 million third-quarter profit that just hit estimates. But Musk also pulled the plug on rosy expectations for the next three months. The stock had already come off its all-time high a month ago after the battery in a couple of its award-winning Model S sedans caught fire. The news on Nov. 5 sent shares crashing by more than a tenth in after-hours trading.

There’s nothing disastrous in Musk’s declaration that earnings in the fourth quarter are likely to be “about consistent” with the previous three months. After all, Tesla is trying both to ramp up sales of its Model S, as well as expand abroad and get cracking on a couple of new vehicles. Speed bumps are common in multi-year projects in auto manufacturing, as investors have learned to their cost over the years.

The trouble is that sell-side analysts were, on average, modeling for an 80 percent increase in the bottom line in this year’s final reporting period. Shareholders gleefully joined in the exuberance.

On Nov. 5 with a closing price of $177 a share – before Tesla published its report – the company was valued at a whopping 37 times estimated 2016 net income, according to Thomson Reuters data. It’s a multiple that assumes Tesla will soon either become a mass-market automaker to rival the likes of Ford and BMW, or achieve tech-like margins.

Neither is likely. Tesla says it will sell 21,500 cars this year. That may double or triple over the next couple of years, but even then the company will still be a minor player. Meanwhile, it’s true that Musk is shooting for an impressive-sounding 25 percent gross margin, but that excludes research and development as well as general and administrative costs.

Strip those out and Tesla’s on course for a 2016 pre-tax margin of 10.8 percent. That’s what Ford tends to crank out in North America. It’s good for a car company, but hardly in the same league as the 25 percent-plus pre-tax margins the likes of Google and Apple produce.

Pop Tesla’s 2016 earnings estimate of $4.82 a share on BMW’s 2016 multiple, and Tesla shares are worth just $48 a share. That’s impressive for a relative upstart in a business that’s hard to break into. And its more rapid growth deserves a higher multiple than its German rival. But shareholders who think Musk can work miracles may be in for a rude awakening.

 

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